Economic growth is expected to reach approximately three percent in 2024, while inflation is predicted to slow down to about 4.5 to five percent, according to researchers at the Foundation for the Advancement of Economics (FREN) of the Faculty of Economics in Belgrade.
There is still uncertainty regarding geopolitics as it remains challenging to estimate the direction of the situation in that field, as stated in the Quarterly Monitor, a macroeconomic report published by FREN four times a year.
“We have seen a moderate recovery in economic activity this year. The difference compared to last year is that this year, we have a growing rate of economic growth throughout the year,” said Milojko Arsić, a professor at the Faculty of Economics in Belgrade.
The main drivers of economic growth in the coming year will be the rise in real incomes, a decrease in inflation, productivity growth, as well as a mild recovery in the European Union. On the other hand, high-interest rates will slow down growth, it is added.
Both the projection of economic growth and inflation are more optimistic than previous forecasts by FREN economists. Arsić mentioned that the restrictive monetary policy and the decline in prices in the rest of Europe, especially the drop in the inflation rate in countries that are Serbia’s major trading partners, largely influenced the slowing growth of prices.
Unrealistic picture of economic growth
On the other hand, the economy is set to grow by around three percent, Arsić stated, explaining that this year’s growth of about 2.3 or 2.4 percent (as expected) does not present a realistic picture.
“It is estimated that the combined impact of one-off factors on economic growth this year amounted to about one percentage point, which means that without them, economic growth would have been around 1.5 percent,” FREN’s statement reads.
Arsić explained that this refers to the recovery from drought in the agricultural season, recovery from the energy system breakdown, and an unusually large surge in construction activity. “We cannot count on any of these three factors in the next year,” Arsić said.
He added that the construction sector recorded good results, mostly due to an inaccurate calculation of activities from 2022, which also cannot be relied upon in 2024.
NBS to cut rates by mid-year
One of the risks to inflation would be the decision of the National Bank of Serbia (NBS) to prematurely reduce interest rates, or the decision of the European Central Bank to do so before their current plans.
“We expect the NBS to reduce interest rates in the second half of 2024, but it could happen a bit earlier,” Arsić said.
He added that interest rates should remain high in the “coming months” as November saw the highest inflation in Europe.
Inflation could also increase if there is significant growth in energy and other primary product prices in the global market, the professor added.
“An additional reason for maintaining a restrictive monetary policy is that the core inflation, which reflects the impact of systemic factors (fiscal and monetary policies, wage movements), remains high,” the report states, adding that rate reduction would be justified only when both core and overall inflation fall within the NBS target range.
Improved foreign trade movements
Regarding foreign trade, the situation is much better than it was in 2022, according to FREN. The current account deficit in the first three quarters amounted to only 1.6 percent of GDP, while in the same period in 2022, it was as high as 7.8 percent, mostly due to energy imports.
“The reduction in the trade and current account deficits compared to the previous year is largely the result of resolving issues in the energy sector and improvements in export and import prices in the global market,” the report states.
Additionally, this indicator was influenced by a slight increase in domestic savings.
Economists expect an increase in the current account deficit to about three percent of GDP in the coming year due to “the real strengthening of the dinar, as well as an increase in unit labor costs.”
Besides these indicators, economists expect a mild recovery in the labor market with a decrease in the unemployment rate and real wage growth of about three to four percent.
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